Q1: Assume that there is a simultaneous increase in government spending and a monetary contraction. In...

Q1: Assume that there is a simultaneous increase in government spending and a monetary contraction. In a flexible exchange rate regime, we know with certainty that such a policy mix will cause which of the following?
Group of answer choices
A decrease in output.
A decrease in the domestic interest rate.
None of the other answers is correct.
A depreciation of the domestic currency.
A decrease in net exports.

Q2: As product markets become more competitive and the mark-up ratio decreases, we would expect which of the following to occur?
Group of answer choices
an increase in the interest rate in the medium run
an increase in output in the medium run
none of the other answers is correct.
no change in the real wage in the medium run
an increase in the aggregate price level in the medium run

Q3: Question 13 1 pts
Suppose there is an increase in government spending in a closed economy. In medium-run such a fiscal policy will cause:
Group of answer choices
the neutral real interest rate to rise
the nominal wage to rise
no change in the neutral real interest rate
ambiguous effects on the neutral real interest rate
none of the other answers is correct

Q4: As an economy adjusts to a decrease in the saving rate, according to Solow model, we would expect output per worker
Group of answer choices
to return to its original level.
to decrease at a constant rate and continue decreasing at that rate in the steady state.
to increase at a permanently higher rate.
none of the other answers is correct.
to decrease at a permanently higher rate.

Solutions

Expert Solution

1. Option E A decrease in net exports.

In Mundell-Fleming framework, when IS curve shifts to the right and LM curve shifts to the left, interest rate is higher and nominal exchange rate is higher. Marshall-Lerner condition tells that appreciation of domestic currency will deteriorate net export.

2.Option C none of the other answers is correct.

This will lead to increase in real wage rate in the medium run.

3. Option A the neutral real interest rate to rise

In the medium run both fiscal and monetary policy have no effect on the natural level of output but the price level increases in both cases. In contrast to the expansionary monetary policy, the expansionary fiscal policy causes an increase in the interest rate in the medium run.

4.Option C decreasing at that rate in the steady state.

A reduction in the saving rate will reduce investment, capital and output. During the adjustment process, the rate of growth of output will be negative. However, at some point, I, K and Y will no longer fall. So, the reduction in the saving rate will not have a permanent effect on the rate of growth of output.

Rahul Sunny answered 1 year ago

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